DEMYSTIFYING ESG

IN THE PUBLIC SECTOR

A WHITE PAPER ON CHICAGO’S INNOVATIVE

APPROACH TO ESG INTEGRATION

CITY OF CHICAGO
CITY TREASURER'S OFFICE • KURT A. SUMMERS, JR.,TREASURER
I. EXECUTIVE SUMMARY
With $3.2 trillion in financial assets, state and local governments in the United States hold a
tremendous amount of capital. However, public treasuries responsible for managing these assets
have traditionally taken a less active and less modern approach to portfolio management, resulting
in missed opportunities to drive additional value for constituents. One of these missed opportunities
is Environmental, Social, and Governance (ESG) integration, an investment strategy that has become
increasingly popular among other investment institutions. In fact, from 2005 to 2018, there has been a
seven-fold increase in assets under management using ESG strategies.1 Through ESG, investors can
improve returns, mitigate risk, and generate impact.
This white paper describes the work of the Chicago City Treasurer’s Office to take advantage of the
unique opportunity that ESG presents to public-sector investors. After designing and implementing a
customized ESG model for its $8 billion investment portfolio, Chicago became the largest city in the
country to integrate ESG factors into 100% of its investment decisions on corporate bonds. In addition,
Chicago became the first city in the world to create an overall ESG portfolio score and to sign onto
the United Nations-supported Principles for Responsible Investment. Through ESG, Chicago has been
able to generate more impact without sacrificing performance, as well as provided an ESG roadmap for
thousands of public treasuries across the country. If a critical mass of public treasuries were to integrate
ESG factors into their investment decisions, then they could not only improve financial returns and
reduce the overall risk profile of their respective portfolios but also align trillions of investment dollars
with the broader public interest.
II. BACKGROUND
The State of Public Treasuries
Across the United States, public treasuries
help state and local governments manage Governmental Bodies in the United States
their financial assets, typically under the
3,031
leadership of chief investments officers (CIOs), Counties
chief financial officers (CFOs), controllers,
16,360 12,880
comptrollers, and treasurers. By managing Independent School Districts
cash and investments, public treasuries play
important roles in the functioning of the Municipalities
19,519
90,000+ governmental bodies across the
38,266 Special Districts
country.2
Collectively, public treasuries manage about Towns/Townships
$3.2 trillion in non-retirement assets, which
largely consist of operating, reserves, and Figure 1: Graph showing breakdown of governmental bodies in the
bond proceeds portfolios. Debt securities United States as of 2012. Data from the U.S. Census Bureau.
account for about 44% of these non-retirement
assets, making up the largest share of any asset class. In addition to these assets, public treasuries also
have influence over $9.0 trillion in employee retirement funds.3

1
Report on US Sustainable, Responsible and Impact Investing Trends. 2018, US SIF Foundation, Print.
2
American FactFinder - Results, Data Access and Dissemination Systems (DADS), 5 October 2010, Web.
3
The Fed - Money Stock and Debt Measures - Z.1 Release”, Board of Governors of the Federal Reserve System, Board of Governors of the Federal Reserve System,
Board of Governors of the Federal Reserve System (U.S.), 7 March 2019, Web.

• 1
 Breakdown of Financial Assets Held by State and Local Governments

$110M Cash and Cash Equivalents

$246M
Corporate Equities
$254M
Debt Securities
$402M Loans/Mortgages
Miscellaneous Assets
$158M
Money Markets
$144M
Mutual Funds
$1,401M
$87M Security Repurchase Agreements
$25M
$226M Taxes Receivable
$129M
Time and Savings Deposits
Trade Receivables

Figure 2: Graph showing breakdown of financial assets held by state and local governments in the United States as
of Q4 2018 (not including employee retirement funds). Data from the Federal Reserve.

The State of ESG Integration

In 2004, the United Nations Global Compact

released a report on how to better integrate Growth of ESG Integration for U.S.-
ESG issues into investment management. Domiciled Assets
Since then, ESG has become $14.0
increasingly popular among investment $12.0
$11.6T

institutions, with an almost seven-fold increase $10.0

$8.1T
$ (Trillions)

in assets under management using ESG $8.0 $6.2T

strategies from 2005 to 2018. According to $6.0
the US SIF Foundation, there are now $11.6 $4.0
$2.1T $2.6T
$3.3T
$1.7T
trillion in U.S.-domiciled assets managed $2.0
with ESG strategies, which accounts for over $-
2005 2007 2010 2012 2014 2016 2018
one-fourth of all assets under professional
management.4 Figure 3: Graph showing growth of U.S.-domiciled assets managed
The proliferation of ESG strategies has largely with ESG strategies. Data from the US SIF Foundation.
been driven by growing empirical evidence
that ESG factors are material to financial performance. In 2016, Barclays released a comprehensive
study of ESG integration for fixed-income portfolios, finding that portfolios with high ESG ratings
outperformed their counterparts by an average of 2 percent cumulatively over a seven-year period.5
In 2017, Morningstar published similar research showing that sustainable funds outperform their peers
and compare favorably on a risk-adjusted basis.6

4
“Sustainable Investing Assets Reach $12 Trillion as Reported by the US SIF Foundation’s Biennial Report on US Sustainable, Responsible and Impact Investing Trends”, US
SIF Foundation, 2018, Print.
5
Sustainable Investing and Bond Returns – Barclays, Barclays Investment Bank, n.d., Web.
6
Jon Hale, “Does Sustainable Investing Help or Hurt Returns?” Morningstar.com, 7 December 2017, Web.
• 2
The Rationale for ESG Integration in Public Treasuries Case Study: Beverage Company A vs. B

Especially compared to more traditional investors, public Two of the world’s largest beverage
treasuries have the most to gain from ESG integration, both as companies often issue nearly identical
fiduciaries and stewards of the public trust. securities. Beverage Company B,
however, has low governance (G) scores
due to excessive CEO pay and lack of
•As fiduciaries, public treasuries are unique among investors gender equity on their board, as well as
in that they prioritize principal protection and have minimal low social (S) scores due to controversies
ability to take on portfolio risk. Given that ESG factors around labor management. With ESG,
allow investors to identify material financial and non- the Chicago City Treasurer’s Office has a
financial risks in advance of making an investment, public framework for making decisions between
treasuries should be especially interested in ESG integration these otherwise similar securities. Data
on two nearly identical issuances is
as a risk mitigation strategy. included below.

•As stewards of the public trust, public treasuries also have Comparison of Nearly Identical Securities
the unique duty of serving their tax-paying constituents. As Company A Company B
a result, many have the added incentive of leveraging their Coupon 2.45 3.125
capital to advance the public’s policy priorities on issues Maturity 11/1/2020 11/1/2020
such as climate change, human rights, income inequality, S&P Rating A+ A+
long-term corporate sustainability, and more. Price 99 100.16
Yield 3.01 3.04
When considered alongside traditional financial factors like credit 6.01 ESG Rating 6.71
quality, duration, and yield, ESG integration can be additive Figure 4: Case study on how ESG provides a
in the security selection process for public treasuries. Public framework for making investment decisions. Data
pension funds like the California Public Employees’ Retirement from Bloomberg.
System7 and the New York City Pension Funds8 have already adopted similar ESG approaches, and it
is now time for cities, counties, and states to follow suit with their own portfolios, making a positive
impact not just on their residents but also on the future of corporate actions.

III. CHICAGO AS A CASE STUDY

The Chicago City Treasurer’s Office

The City of Chicago is the third-largest city in the United States and has an annual operating budget
of roughly $8.6 billion.9 In Chicago, the City Treasurer’s Office acts as the public’s investment manager,
with an $8 billion investment portfolio. Similar to other public treasuries, the office’s investments are
subject to an Investment Policy Statement that is governed by the Chicago Municipal Code and the
Illinois Compiled Statutes.

The Chicago City Treasurer’s Office falls under the purview of the City Treasurer, one of three city-
wide elected officials in Chicago. From December 2014 to May 2019, the post was held by Kurt A.
Summers, Jr.

7
Michael Katz, “CalPERS Makes ESG Changes”, Chief Investment Officer, Strategic Insight Inc., 30 November 2018, Web.
8
“On Earth Day, Comptroller Stringer Announces NYC Pension Funds Have Launched the City’s First-Ever Search for Investment Managers with Low-Carbon and Sustainable
Indexes”, Office of the New York City Comptroller, 22 April 2017, Web.
9
City of Chicago. Comprehensive Annual Financial Report for the Year, Chicago, IL: Department of Finance, 31 December 2017, Print.
• 3
Portfolio Modernization Detailed Asset Allocation for the Chicago City Treasurer's Office
$110M
$239M
In 2015, the Chicago City Treasurer’s Office began
Agency Bond
to take a more active role in the management of $1,014M
Cash
$1,086M
the city’s financial assets through a three-year- $832M Commercial Paper
long portfolio modernization effort. This portfolio Corporate Bond
modernization effort included implementing a $2,280M Money Market
$1,893M
range of innovative strategies to foster a smarter Municipal Bond

and more active investment approach. Other

$1,399M Treasuries

•First, the office worked with the Chicago

City Council to modify the Investment Policy Figure 5: Graph showing asset allocation of the Chicago City Treasurer's Office as of Q4 2018.
Statement, allowing for more diversification
into different asset classes – such as increased allocation to corporate securities and short-duration
asset-backed securities – and increased accountability with the establishment of a minimum overall
portfolio credit rating;

•Second, the office modernized its technology, leveraging Portfolio Modernization for the Chicago
Bloomberg and Clearwater software to allow for more City Treasurer’s Office
informed investment decisions made with better, up-to-date 2015 2018 Δ
financial data and reporting; and Credit AA+ AA+ No
Rating Change
•Third, the office implemented more efficient cash and Duration 3.4 1.8 ↓ 47%
Years Years
investment management strategies, consolidating bank
Yield-to- 1.3% 2.3% ↑ 77%
accounts, lowering banking fees, and better allocating and Maturity
sweeping cash to invest at higher interest rates. Earnings $57.9M $156.1M ↑ 170%
Figure 6: Table showing portfolio modernization
from 2015 to 2018.
Through taking a more active role in portfolio management,
Chicago developed a higher-quality portfolio with increased
investment returns, lower duration, and increased yield—all while maintaining an overall portfolio credit
rating of AA+. In addition, Chicago’s portfolio had significantly more diversification when compared
to national figures for state and local governments, which suggests that other public treasuries have
significant opportunities to take a more active approach to portfolio management that could both
increase the quality of their portfolios and improve performance.

Breakdown of Debt Securities Held by Chicago vs. All State and Local
Governments
60%
49%
50%

40% 33%
32%
30% 25%
21% 19%
20% 13%
10% 5%
1% 2%
0%
Agency- and GSE-Backed Corporate and Foreign Municipal Securities Open Market Paper U.S. Treasuries
Securities Bonds

Chicago City Treasurer's Office All State and Local Governments

Figure 7: Graph comparing debt securities held by the Chicago City Treasurer’s Office versus all state and local
governments as of Q4 2018 (not including employee retirement funds). “Open Market Paper” is inclusive of
commercial paper. “Corporate and Foreign Bonds” is inclusive of supranational bonds. Data from the Federal
Reserve and the Chicago City Treasurer’s Office.
• 4
ESG Model Development

In 2017, the Chicago City Treasurer’s Office identified ESG integration as a significant opportunity to
build on this portfolio modernization by driving more favorable risk-adjusted returns and better aligning
investments with the interests of Chicagoans, from protecting the environment to combatting income
inequality to supporting diversity on corporate boards. As such, in an October 2017 testimony before
the Chicago City Council, Treasurer Summers promised to explore incorporating “environmental,
social, and governance (ESG) concerns into investment decisions.” Treasurer Summers added that
“investing in companies reflective of our values is not just the right thing to do…it will also drive
better risk-adjusted returns in the long-run.”10 The office then began an in-depth review of available
resources from the financial services industry in order to bring ESG integration into the heart of the
office’s investment decision-making process.

However, the office felt it needed to make adjustments to the data in order to account for its own
analysis of materiality—and to emphasize the issues that matter most to Chicago’s residents. Since
none of the providers allowed for this degree of customization, Treasurer Summers tasked a small
group of staff (Chief Investment Officer Jabari Porter, Deputy Chief Investment Officer Mary Christine
Jackman, Summer Associate Jessica Green, and Assistant City Treasurer Asher Mayerson) to build a
model that allowed for customized weights on ESG factors, thus creating ESG scores that better reflect
the office’s unique mandate. Over the course of eight months, they developed a customized ESG
model that has since been covered in Bloomberg,11 The Chicago Tribune,12 The Wall Street Journal,13
and other news outlets.

There were three key stages during the process to develop Chicago’s ESG model: procuring ESG data,
selecting key factors, and developing a weighting mechanism.

•Step 1 – Procuring ESG Data: The office’s first step was to procure data from leading sources of
ESG information. After reviewing several available options, the office chose to leverage MSCI ESG
Research (MSCI) as its primary source of raw data. Chicago’s model uses MSCI’s mapping of raw
data factors into key issue scores, which “translates” the raw data into standardized scores on scales
from 0 to 10 that can then be weighted methodically across the model. In addition to MSCI, the
office also chose to leverage Sustainalytics, RobecoSAM, Moody’s, and other individual specialty
data providers on a regular basis. These data providers have thousands of available factors that
can be integrated into investment decisions, often with different raw data factors used in different
industries to create industry-level adjustments for company scores.14

•Step 2 – Selecting Key Factors: The office’s second step was to select key factors that it found
to be particularly material to financial performance or particularly important to the well-being of
Chicagoans. To determine factors that are particularly material, the office used existing resources
from several industry-leading groups, as well as tested their empirical relevance by back-testing
within the portfolio. To determine factors that are particularly important to the well-being of
Chicagoans, the office reviewed the most pressing issues facing Chicago’s residents and identified
ESG factors that best capture those issues. This extensive process led the office to “flag” 170 key
factors for overweighting: 41 environmental factors, 60 social factors, and 69 governance factors.

10
“Summers Budget Testimony 2018”, Scribd, Scribd, 24 October 2017, Web.
11
“Governments Push ESG Investment Forward | Bloomberg Professional Services”, Bloomberg.com, Bloomberg, 13 March 2018, Web.
12
Michael Hawthorne, “Chicago Treasurer: Use City’s Investment Portfolio to Fight Climate Change, Promote Social Progress.” Chicago Tribune, Chicago Tribune, 1 March
2018, Web.
13
Sarah Krouse, “City Officials Want Chicago to Become a Responsible Investor”, The Wall Street Journal, Dow Jones & Company, 28 February 2018, Web.
14 MSCI ESG Ratings Methodology. MSCI ESG Research LLC, 2018. https://www.msci.com/documents/10199/ 123a2b2b-1395-4aa2-a121-ea14de6d708a
• 5
 •Step 3 – Developing Weighting Mechanism: The office’s third step was to develop a weighting
mechanism that would allow these 170 factors to be overweighted, thus having a disproportionate
impact on overall ESG scores. The office’s model redistributes weights in the construction of three
levels of scores: themes level, pillars level, and overall score level.15 Detailed information on this
weighting process is included in the appendix. Through its unique weighting mechanism, Chicago’s
model upholds the office’s responsibilities as a fiduciary and a steward of the public trust; remains
consistent across sectors and securities; and ensures that no single factor disproportionately impacts
the overall ESG score.

Raw Data Overall

Key Issues Themes Pillars
Factors Score

33 key issue
10 theme scores 3 pillar scores
Hundreds of raw scores are
are weighted are weighted
data factors are weighted
together to together to
mapped to key together to
construct pillar construct the
issue scores construct theme
scores overall score
scores
Figure 8: Weighting process for the Chicago City Treasurer's Office's customized ESG model. Additional information
is included in the appendix.

ESG Model Implementation Asset/Liability Management

In-Flows Out-Flows

In July 2018, the City Treasurer’s Office began to

implement its customized ESG model on 100% of
Macroeconomic Outlook
corporate bond purchases. ESG integration is now part Fiscal and
Global Growth
Business Cycle Credit Cycle Monetary Policy
of the office’s overall investment analysis and decision- Cycle
Outlook

making framework, with ESG scores considered alongside

traditional financial metrics (e.g., credit quality, duration, Portfolio Strategy
and yield) at the security selection level. Operationally, Asset Allocation Portfolio Duration Security Structure

ESG factors are incorporated into the office’s internal

processes through a graphical user interface that was
Security Selection Process
built in-house using SQL, a programming language
Credit Quality Duration Yield ESG Score
used for storing, manipulating, and retrieving data.
Figure 9: Framework for the office's investment analysis and decision-making
Figure 9: Framework for the office’s investment analysis and decision-making process,
process,
which nowwhich now
includes includes ESG.
ESG.
ESG Approaches to Other Types of Securities

The scoring process described in the previous section applies to

Case Study: Tesla Asset-Backed Notes
corporate bonds that are issued to finance operations. However, the
Chicago City Treasurer’s Office also wanted to take an opportunistic In December 2018, the City Treasurer's
approach to securities that are issued to finance ESG-friendly Office purchased $10 million in Tesla
asset-backed notes, financing leases for
projects. Those securities have been issued by a wide range of Tesla Model S & X electric vehicles. Over
issuers, including corporations (e.g., Tesla Asset-Backed Notes16), the projected ten-year life of the
government agencies (e.g., GNMA Project Bonds), and supranational vehicles, the $10 million purchase will
reduce greenhouse gas emissions by
organizations (e.g., African Development Bank Green Bonds17). ~4,700 tons in total, according to data
from the U.S. Department of Energy.
With these issuances, the ESG scores for the enterprises fail to reflect Figure 10: Case study on security with strongly
the extent to which the specific issuances are ESG-friendly. As such, positive environmental benefits.
the office sought to proactively find these types of issuances, as well as adjust their ESG scores to reflect
the ESG-friendly nature of the issuances. Specifically, the ESG scores for these securities are created by
taking the enterprise’s ESG score, then adjusting one of the three pillars (E, S, or G) to reflect the strong
15
MSCI ESG Ratings Methodology. MSCI ESG Research LLC, 2018.
16 • 6
Tesla Auto Lease Trust 2018-B”, Tesla Finance LLC, Tesla, 10 December 2018, Print.
17
“Green Bonds”, African Development Bank Group, AfDB Group, November 2018, Web. ­­­­­­­­­­­­­­­­­
environmental, social, or governance benefits of the issuance. For example, for corporate-issued green
bonds, the ESG model increases the security’s “E” score to reflect the strong environmental benefits,
but holds constant the “S” and “G” scores of the corporate issuer. Similarly, for U.S. agency bonds
to finance affordable housing, the model increases the security’s “S” score to reflect the strong social
benefits, but holds constant the “E” and “G” scores of the U.S. government.

Overall ESG Portfolio Score Development

To measure the impact of ESG integration on security selection, the Chicago City Treasurer’s Office
developed the first-ever overall ESG portfolio score. This score achieves two core objectives.

•Provides a Benchmark: The overall ESG portfolio score provides a benchmark to ensure that the
office is not simply “considering” ESG factors but rather is giving them meaningful consideration
in the investment decision-making process, just as one would when evaluating credit quality,
duration, or yield. This benchmark is particularly important today, as critics of ESG integration have
charged that some asset managers may be considering ESG factors—but that those ESG factors
are given little to no weight, or have no formal role or measure of accountability, in the security
selection process.

•Ensures a Holistic Approach: The overall ESG portfolio score allows the office to take a holistic
approach to ESG integration. Instead of applying negative screening strategies for individual
securities, the office can construct an entire $8 billion portfolio that better aligns with the public’s
policy priorities.

The methodology for the overall ESG portfolio score is similar to a weighted average credit quality
measure for a portfolio. To develop the overall ESG portfolio score, the office calculates the weighted
average ESG rating of corporate bonds in the portfolio,
in addition to the types of proactive, socially responsible
securities described in the previous section. This weighted
average is then benchmarked against all corporate bonds
that are rated and in the office’s investible universe,
delivering a quantitative measure for the extent to which
the portfolio outperforms rated corporate bonds that are
allowable per the Investment Policy Statement.
Case Study: GNMA Project Bonds
In 2018, the City Treasurer's Office
purchased $65 million in project bonds
from the Government National Mortgage
Association (GNMA). GNMA is a wholly
owned government corporation within the
U.S. Department of Housing and Urban
Development, and is dedicated to
expanding affordable housing financing
across the country. The City Treasurer's
Office's purchases have helped finance
housing upgrades in underresourced
Chicago communities, including an
affordable senior housing facility in the
Bronzeville neighborhood on the South
Side and a nursing facility in the Rogers
Park neighborhood on the North Side.
Figure 11: Case study on security with strongly positive
social benefits.

• 7
Overall ESG Portfolio Score Implementation

In February 2019, the City Treasurer’s Office first reported an overall ESG portfolio score with an
accompanying benchmark through a Quarterly Earnings Call. As of then, the office had held 16 of
these first-of-their-kind calls, which are accompanied with PowerPoint slides that provide investors,
members of the press, and the public with transparent information about the office’s investment
portfolio performance. The overall portfolio score that was reported on the call was 6.7—higher than
85% of the ESG scores of rated corporate bonds in the office’s investible universe.

Figure 12: Slide from the Chicago City Treasurer's Office's Q4 2018 Earnings Call (February 19, 2019), which shows
the overall portfolio score benchmarked against all rated corporate bonds in the office’s investible universe.

Initial Results

While the office has only been using its ESG model since July 2018, it has demonstrated strong initial
results, demystifying some of the perceived risks and showcasing the potential impact of ESG for
public-sector investors.

•Generated Higher Earnings: Chicago has generated higher earnings after implementing
its ESG model. Specifically, the office performed better in the three quarters post-ESG
implementation than in any three-quarter stretch since Treasurer Summers took office in
December 2014.

•Achieved Carbon-Neutral Portfolio: Chicago has achieved a carbon-neutral investment

portfolio, with every dollar invested in the world’s top 200 coal and oil/gas reserve owners
(~$70 million as of Q1 2019, which equates to ~17,000 metric tons of carbon emissions annually)
offset with at least one dollar in an environmentally-friendly security. Specifically, in 2018, the
office purchased ~$82.7 million of green bonds issued by the African Development Bank and
the State of Massachusetts, which will eventually save ~400,000 metric tons of carbon emissions
annually. Chicago’s dollar-for-dollar matching approach has been more effective than the
traditional approach of purchasing carbon offsets in two key ways. First, Chicago’s approach
has led to a greater annual reduction of carbon emissions (~400,000 metric tons, compared to
only ~17,000 metric tons under the traditional approach). Second, Chicago’s approach has led
to more capital in green projects (~$82.7 million, compared to only ~$850,000 in traditional
carbon offsets – if purchased at a conservative price of $50/metric ton – under the traditional
approach).18
18
“Green Bonds”, African Development Bank Group, AfDB Group, November 2018, Web; MSCI ESG Manager, MSCI ESG Research LLC, 2019; “Unlocking Potential: State of the Voluntary
Carbon Markets 2017.” Convention on Biological Diversity, May 2017, Web.
• 8
 •Signed Onto UNPRI: In September 2018, Chicago became the first city in the world to become
a signatory to the United Nations-supported Principles for Responsible Investment (UNPRI), joining
roughly 2,000 existing signatories representing about $80 trillion in assets. Treasurer Summers
announced this move as the closing speaker at UNPRI’s annual “PRI in Person” conference in
San Francisco, CA.19 Through UNPRI, the Chicago City Treasurer’s Office has committed to six core
principles for incorporating ESG issues into investment practices. On April 1, 2019, the Treasurer’s
Office submitted its first annual report to UNPRI.

•Joined US SIF: In June 2018, Chicago became the first city in the country to become a member
of US SIF: The Forum for Sustainable and Responsible Investment.20 US SIF is the hub of sustainable
and responsible investing in the United States, and has approximately 300 members representing
over $3 trillion in assets.21 Summers was subsequently elected to US SIF’s Board of Directors.

Chicago’s Quarterly Earnings (Pre- and Post-ESG Model Implementation)

$60.0

ESG Model $52.6M

Implementation
$50.0 $47.5M $46.4M

$40.0
Pre-ESG Quarterly
Quarterly Earnings

Earnings Average $33.3M

($ Millions)

$30.8M $31.1M $31.1M

($29.9M)
$30.0 $28.2M
$24.8M

$20.0

$10.0

$-
Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
Figure 13: Graph showing quarterly earnings of the Chicago City Treasurer’s Office from Q1 2017 through Q1 2019, comparing earnings
before and after ESG model implementation. Earnings are unaudited and drawn from Chicago’s Quarterly Earnings Calls.

19 “Treasurer Kurt Summers Announces Chicago Has Joined United Nations-Supported Responsible Investing Initiative”, Office of the City Treasurer, City of Chicago, City of Chicago, 18
February 2019, Web.
20
“Treasurer Summers Announces Chicago as First City to Join US SIF”, Office of the City Treasurer, City of Chicago, City of Chicago, 1 June 2018, Web.
21 Report on US Sustainable, Responsible and Impact Investing Trends. 2018, US SIF Foundation, Print.
• 9
IV. ALTERNATIVE AND ADDITIONAL STRATEGIES

Divestment and Other Negative Screening Strategies

Case Study: Equifax Inc.
Public treasuries and other investment institutions often see
“divestment” and other negative screening strategies Equifax Inc. is a consumer credit reporting
as alternatives to ESG integration. In September 2018, agency that, in 2017, experienced a data
for example, New York City Mayor Bill de Blasio and breach exposing the sensitive personal
London Mayor Sadiq Khan co-authored an op-ed in The information of almost 150 million U.S.
Guardian calling on cities to divest from fossil fuels.22 consumers. The data breach significantly
Divestment is a term used in the context of removing affected Equifax's stock value, which
assets not only from fossil fuel companies but also from dropped roughly 35% in a short fifteen-
companies in the tobacco industry, companies operating day stretch from opening on Sept. 1, 2017
private prisons, and other companies engaging in socially ($142.73) to closing on Sept. 15, 2017
irresponsible behavior.23 ($92.98). A leading provider of ESG data
that tracks data security had down-graded
The Chicago City Treasurer’s Office strongly prefers ESG Equifax on this metric well before the data
integration to divestment, since ESG’s holistic approach breach. Investors who relied on this ESG
is superior to mitigating risk and influencing corporate analysis to make trades with Equifax
•Mitigating Risk: ESG integration captures hundreds of
action. securities, therefore, were able to mitigate
environmental, social, and governance issues that are their risk exposure.
important to a company’s risk profile, rather than simply
Figure 14: Case study on importance of using a wide
focusing on carbon emissions. The case of data security
range of ESG factors to mitigate financial risk.
with Equifax, described in the case study on the right,
is just one of many examples in which non-carbon
related ESG factors have been important to identifying
and mitigating financial risk.24

•Influencing Corporate Action: ESG integration provides both positive and negative incentives for
companies. Therefore, rather than simply being denied capital regardless of whether their behavior
changes, ESG motivates companies to improve their behavior and gain access to additional pools
of capital.

Impact Investing and Other Positive Screening Strategies

In addition to ESG integration, impact investing and other positive screening strategies provide a
range of opportunities for public treasuries to drive value for constituents.

•Portfolio Investments in Local Companies: Public treasuries may wish to prioritize the purchase
of securities from local companies. By investing in local companies, public treasuries can generate
returns while also creating local jobs and boosting local tax revenues.

•Deposits in Local Financial Institutions: Public treasuries that manage cash deposits may seek to
prioritize community banks, credit unions, and other local financial institutions. By making these
local deposits, public treasuries can help put taxpayer dollars back into their communities, helping
drive a positive cycle of economic development—particularly in traditionally underserved areas that
are in need of capital.
22 Sadiq Khan and Bill de Blasio, “As New York and London Mayors, We Call on All Cities to Divest from Fossil Fuels”, The Guardian, Guardian News and Media, 10 September 2018, Web.
23 Laila Kearney, “Chicago Teachers Pension Fund Divesting from Private Prisons”, Reuters, Thomson Reuters, 17 August 2018, Web.
24 Asjylyn Loder, “A Warning Shot on Equifax: Index Provider Flagged Security Issues Last Year”, The Wall Street Journal, Dow Jones & Company, 6 October 2017, Web.

• 10
V. RECOMMENDED NEXT STEPS FOR PUBLIC TREASURIES
Through the development of its own approach to ESG integration, the Chicago City Treasurer’s Of-
fice hopes to serve as an example to other cities, counties, and states. Since ESG can drive value for
public-sector investors, it is more than just permissible for public treasuries to adopt ESG approaches;
rather, it may be considered as part of their fiduciary duty to do so. As such, the Chicago City Treasur-
er’s Office strongly recommends that public treasuries take their own approaches to ESG integration,
using the suggested next steps outlined below.
Step 1: Evaluate Status Quo and Identify Opportunities to Drive Additional Value with ESG
Prior to making any changes to the investment process, public treasuries seeking to drive value for
their constituents need to evaluate their status quo by asking a number of important questions around
their mandate, holdings, and portfolio strategy.
•Mandate: What is the office’s mandate as an investor and as a steward of the public trust?
•Holdings: To what extent are the office’s existing holdings aligned with the office’s mandate?
•Portfolio Strategy: Can a more active and sophisticated portfolio strategy lead to higher returns,
lower risks, or greater alignment with the public’s priorities?
Through asking these difficult but important questions, public treasuries can better understand the val-
ue of taking a more active role in investment management, including but not limited to ESG integra-
tion. By taking greater responsibility for portfolio strategy, public treasuries can significantly increase
the alignment of their holdings with their office’s mandate.
Step 2: Identify and Address Barriers to ESG Integration
After better understanding the importance of ESG to fulfilling the office’s mandate, public treasuries
need to identify and address barriers to its implementation, including investment policy and operational
constraints.
•Overcoming Investment Policy Constraints: Public treasuries are often limited by strict invest-
ment policies that were created decades ago and fail to reflect changing market dynamics and
public priorities. As such, it is important for public treasuries to work with their partners in the leg-
islative body, as needed, to allow for greater portfolio diversification, including expanding the abil-
ity to purchase instruments with strong ESG benefits, such as project-based, agency-backed bonds
that provide local impact, as well as green bonds and other securities that finance ESG-friendly
projects. With the proper investment policy changes, public treasuries can put themselves in a
position to drive more value for constituents using ESG.
•Overcoming Operational Constraints: Public treasuries are also often limited by operational
constraints that make it difficult to add new levels of sophistication to the investment deci-
sion-making process, including but not limited to constraints on office budgets, technology, and
human capital. Yet, it is important to recognize that there are many options for public treasuries to
take steps toward ESG integration, which require different levels of resources. Even without us-
ing a formal ESG model, public treasuries can find individual securities with strong ESG benefits.
Similarly, even without managing investments in-house, public treasuries can place ESG require-
ments on outside managers. Every public treasury can find value in ESG, no matter their resource
constraints.

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Step 3: Integrate ESG Approaches into Security Selection and Overall Portfolio Management
Once public treasuries overcome the aforementioned constraints, they can begin to develop their
unique ESG approach. Ideally, this approach would involve not only applying ESG factors at the secu-
rity selection level but also benchmarking performance along ESG metrics at the portfolio level.
•Security Selection: All public treasuries – regardless of how their assets are managed – have the
capability to add ESG approaches to the security selection process.
oSome public treasuries manage their investments in-house. These public treasuries can either
procure a standard model from an existing data provider or, similar to the Chicago City Trea-
surer’s Office, build a customized model that reflects their constituents’ policy priorities.

oOther public treasuries outsource their investment management to state-wide pools or use
private outsourced management services from third-party asset management firms. Public
treasuries using these managers can demand that they take the ESG approaches described
above. Moreover, while outsourced investment management may be the right decision for
some public treasuries, it should not be a default option. As such, some public treasuries
may actually benefit from transitioning to an in-house or hybrid management model and
subsequently integrating ESG considerations for a portion of the portfolio themselves.

•Benchmarking: Public treasuries that are pursuing ESG integration need to hold themselves ac-
countable through benchmarks at the portfolio level. Some public treasuries may follow Chicago’s
approach and create an overall ESG portfolio score, while other public treasuries may simply
report on proactive investments that have strong ESG benefits. Through benchmarking, public
treasuries can ensure that they are not simply paying lip-service to ESG factors; rather, they are
bringing ESG into their investment decision-making process in order to better fulfill their man-
date.

VI. CONCLUSION

Over the past few years, ESG integration has become increasingly popular with investment institutions
across the United States, more than tripling in usage from 2012 to 2018 alone. Today, more than
one-fourth of all domestic assets under professional management use ESG strategies.25 The Chicago
City Treasurer’s Office has taken a leadership role among public treasuries, applying innovative ESG
strate-gies to its $8 billion portfolio and demonstrating the potential for public treasuries to derive
significant value from ESG integration.
If public treasuries were to integrate ESG considerations into their investment decisions, then they
would exercise tremendous collective power over the behavior of some of the world’s largest corpora-
tions. State and local governments in the United States manage $3.2 trillion in assets, which is roughly
the size of the United Kingdom’s annual GDP. When combined with employee retirement fund assets,
state and local governments have a role to play in over $12 trillion in assets, which is roughly the size
of China’s annual GDP. Following Chicago’s model, public treasuries have a clear roadmap to integrate
ESG considerations into their investments decisions—and to join a nationwide movement of investing
capital in ways that can be leveraged for positive change.
Despite the challenges that may exist for public treasuries, they must take a more active role in manag-
ing their portfolios, including but not limited to integrating ESG factors into their investment decisions.
Individually, public treasuries can use ESG to drive more value for their constituents by generating higher
returns, lower risks, and more impact. Collectively, public treasuries can leverage ESG incorporation to
set new standards for corporate action, potentially improving the lives of people across the world.
• 12
25
Report on US Sustainable, Responsible and Impact Investing Trends. 2018, US SIF Foundation, Print.
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 VIII. APPENDIX
Overview of ESG Weighting Mechanism
Chicago’s customized ESG model redistributes weights on factors that are “flagged” as particularly
material to financial performance or important to the public interest. The model redistributes weights
at three levels of the scoring process: theme, pillar, and overall score.26
•Theme: Each theme score consists of a weighted average of a set of key issues, each scored on
a scale of 0 to 10. The key issue scores are created by the data provider using a set of raw data
factors, which include factors that are “flagged.” When constructing theme scores, Chicago’s
model redistributes weights for key issues based on the relative number of “flagged” raw data
factors within each key issue. An example of how this process works for the creation of a “climate
change” theme score is included in the footnotes, although the descriptions in this and subse-
quent footnotes are oversimplified and abstract from the fact that different raw data factors are
used to score companies in different industries.27
•Pillar (E, S, G): Each pillar score consists of a weighted average of a set of themes, each scored
on a scale of 0 to 10. As described above, the theme scores are created using weighted key is-
sue scores and, at the most granular level, contain a specific number of factors that are “flagged.”
When constructing pillar scores, Chicago’s model redistributes weights for themes based on the
relative number of “flagged” raw data factors within each theme. An example of how this process
works for the creation of a “governance” pillar score is included in the footnotes.28
•Overall Score: The overall score consists of a weighted average of all three pillars, each scored on
a scale of 0 to 10. As described above, the pillar scores are created using weighted theme scores
and, at the most granular level, contain a specific number of factors that are “flagged.” When con-
structing the overall score, Chicago’s model redistributes weights for pillars based on the relative
number of “flagged” raw data factors within each pillar. An example of how this process works for
the creation of an overall score is included in the footnotes.29

26
MSCI ESG Ratings Methodology. MSCI ESG Research LLC, 2018. https://www.msci.com/documents/10199/ 123a2b2b-1395-4aa2-a121-ea14de6d708a
27
Theme: The “climate change” theme consists of four key issues: carbon emissions (contains 7 “flagged” factors); energy efficiency (contains 1 “flagged” factor); financing
environmental impact (contains 3 “flagged” factors); and product carbon footprint (contains 1 “flagged” factor). In this case, Chicago’s model redistributes weights on the
four key issues to create the theme score as follows: 58.3% weight on carbon emissions (7 out of 12 flagged factors), 8.3% weight on energy efficiency (1 out of 12 flagged
factors), 25% weight on financing environmental impact (3 out of 12 flagged factors), and 8.3% weight on product carbon footprint (1 out of 12 flagged factors).
28
Pillar (E, S, G): The “governance” pillar consists of two themes: corporate behavior (contains 5 key issues with 12 “flagged” factors within them) and corporate
governance (contains 4 key issues with 57 “flagged” factors within them). In this case, Chicago’s model redistributes weights on the two themes to create the pillar score
as follows: 17.4% weight on corporate behavior (12 out of 69 flagged factors) and 82.6% weight on corporate governance (57 out of 69 flagged factors).
29
Overall Score: The overall score consists of three pillars: environmental (contains 4 themes with key issues that have 41 “flagged” factors within them); social (contains
4 themes with key issues that have 60 “flagged” factors within them); and governance (2 themes with key issues that have 69 “flagged” factors within them). In this case,
Chicago’s model redistributes weights on the three pillars to create the overall score as follows: 24% weight on environmental (41 out of 170 flagged factors), 35% weight
on social (60 out of 170 flagged factors), and 41% weight on governance (69 out of 170 flagged factors). • 15
 THEMES KEY ISSUES FACTORS
Carbon Emissions
Climate Change Vulnerability
Climate Change

E-Related Raw Data Factors

Financing Environmental Impact
Product Carbon Footprint
PILLARS

(41 "Flagged")
Opportunities in Clean Tech
Environmental Opportunities in Green Building
Opportunities
Environmental Renewable Energy Opportunities
Biodiversity & Land Use
Natural Resources Raw Material Sourcing
Water Stress
Electronic Waste
Pollution & Waste Packaging Material & Waste
Toxic Emissions & Waste
OVERALL Health & Safety

S-Related Raw Data Factors

SCORE Human Capital Development
Human Capital Labor Management
Supply Chain Labor Standards

(60 "Flagged)
Chemical Safety
ESG Score

Financial Product Safety

Product Liability Health & Demographic Risk
Social Privacy & Data Security
Product Safety & Quality
Stakeholder Responsible Investment
Opposition Controversial Sourcing
Access to Communications
Social Access to Health Care
G-Related Raw Data Factors
Opportunities Access to Finance
Opportunities in Nutrition & Health
(69 "Flagged")
Accounting
Corporate Board
Governance Ownership
Pay
Governance Anti-Competitive Practices
Business Ethics
Corporate Corruption & Instability
Behavior Financial System Instability
Tax Transparency

Pillars Themes Key Issues Raw Data

Weighted to Weighted to Weighted to Factors Used to
Create Overall Create Pillar Create Themes Create Key
Score Scores Scores Issues Scores

Figure 15: Figure showing weighting process for the Chicago City Treasurer's Office's customized ESG model.

• 16